Financial Technologies: Democratizing Trade and Economy Globally
Date: Thursday , November 01, 2007
Financial Technologies (FT) is bringing upon a radical change in normally staid exchange markets by combining its next generation technology platform with its operational experience in running exchanges in India and Middle East. With its unique model of taking an equity stake in “new exchanges”, the company is on its way to provide a disruptive change to world exchange markets. Similar to Toyota’s huge bite into the U.S and global markets in the auto sector by providing top quality car at cheaper prices in ‘90s; and LG’s surge into cell phone and TV markets in world in 2000, Financial Technologies wants to zoom itself in bringing the technologically advanced ‘exchanges’. This defines the “world is flat”, where advanced exchange markets which are the core pillar of capitalism are brought to the Africas, Middle East, South Americas of the world by an Indian company whose core values are to make exchange markets more participatory and to unlock the values hidden in assets to make peoples’ life better. If all goes well, millions of people across the globe, who neither had access nor the privilege to participate in financial markets, will be able to do so. A new class of investors will take birth. Simply put, the exchanges that FT will build will empower a farmer in a small village in India, a gold trader in Middle East, a
silver trader in Malaysia, a farmer in Africa to get involved in trading and get better returns for their investments.
A picture of Jignesh Shah is not hard to imagine while reading through the pages of Thomas Friedman’s renowned book ‘The World is Flat’. Friedman, talking about the flat world and its creation of level playing field, explains how “globalization1.0 and 2.0 were driven primarily by European and American individuals and businesses…Globalization 3.0 is going to be more and more driven not only by individuals but also by much more diverse—non-Western, non-white—group of individuals.”
Shah’s flagship company Financial Technologies is into one such 3.0 business of creating software (to exchange-markets) that aspires to democratize trade and economy globally. That too in countries where trading on exchanges has been inherently non-existent or proven to be unviable (Some don’t even have democratic governments). And, for generic commodities like cotton, wheat and coffee that one never thought can be traded in organized ways or for the geo-specific commodities like iron, copper or gold that are never traded in small quantities.
The conviction inside the company is to solve the world’s biggest and quintessential economic conundrum of bridging the producers and consumers for a win-win alliance. But it is surprising and beholding on what prospects does a technology software company hold in reaching out to the masses—especially to the illiterates or the semi-literates farmers trying to trade their produce. And there in is FT’s rather-too-unconventional approach for a software company: full-bundle suite offering platform, technology, processes and operational know-how in building the next generation exchanges.
“Our next generation exchanges are about selling and buying the non-eBay products with an ease like on an eBay platform,” says Shah continuing, “Whatever it takes to create that experience, we shall build.”
This eBay-like platform for the commodities was the first exchange to be unveiled under the name of Multi Commodity Exchange (MCX) from FT’s closet.
Empowering Rural Economy
Shah and his bunch of four friends, who developed this exchange, were constantly prodded by the thought that farmers only saw about Rs 20 ($.50) out of every Rs 100 ($2.5) consumers spent on their produce, while up to eight intermediaries shared the remaining Rs 80 ($2). MCX in most ways changed that by cutting out touts, doubling the earnings of farmers to $1 and at the same time bringing down the produce price to $1.5 for the consumers to pay the fair price—the remaining 50 cents went to intermediaries who were adding value in the supply chain.
FT’s systems today have established clarity for all people: be it a cotton grower’s confidence in selling his produce to a textiles company months prior to the crop being ready for harvesting; protecting himself against a possible drop in cotton prices in the near future. Or a textiles company in saving itself against a possible sharp rise in the same cotton prices. According to a recent study, potato farmers in the potato-growing states of Uttar Pradesh and West Bengal have realized 25 percent price gains since trading in potato futures began in 2006.
In order to increase participation in geo-specific commodities, the exchange also designed contracts that are in sync with the traders’ needs or familiarity. For example, a small 5-ton contract for copper versus the 25-ton contract that is traded on the London Metal Exchange was a big relief for traders in India.
With an average daily turnover of $2.5 billion (as of September 2007), MCX, despite being a late entrant in the arena, has captured over 70 percent of the commodity futures market. “Markets in an economy play a pivotal role in ensuring benefits of trade are percolated to the middle and bottom of the pyramid individuals. MCX is bringing down the barriers and opening up the markets for every one to compete, grow and get rich,” he says talking about how both trade and economy of nations can be democratized by having efficient systems in place.
Disruptive Growth Model
Since FT’s founding in 1995, the $3 billion (Market Cap) company has leapfrogged to offer next generation financial markets built on their indigenously developed global standard technologies as opposed to some older generation technologies existing in exchanges like Nymex (New York Mercantile Exchange) and LME (London Mercantile Exchange). While technology solutions from IBM or TIBCO are expensive, FT offers the same global standard technology at a 1/5th the cost, and gets them to operationalize at 1/3rd the time it takes for its global competitors.
With newer development in technologies happening at a rapid pace, and most of these behemoth exchanges still using age old systems for the scare associated with migrating to newer systems, FT is at good stead to call itself a “new technology rich kid in the block,” says Joseph Massey, Deputy Managing Director and Chief Operating Officer of MCX.
In another very innovative way, the company has also followed a unique business model of not selling its technology platform, but instead providing a system, alongside the operationalize know-how, to run exchanges in lieu of an equity stake. “Our philosophy is to invest in ventures which are highly scalable with high operating margin and require low fixed capital with negligible working capital,” says Shah.
Dubai Gold & Commodities Exchange (DGCX), for instance, was one of Shah’s first overseas projects which were set up not only in a record time of 1000 days, but also as a 50:50 joint venture between the Dubai Government and FT. Since establishing DGCX in 2005, the aggregate value of contracts traded on that exchange is well beyond $40 billion. With over 200 active members, including JP Morgan, HSBC, ManFinancial, and Deutsche Bank, it’s a laudable achievement for a 24-month-old exchange.
Alongside the low cost systems of FT, are the obvious advantages that the company has found in the stretchy membership prices on most of its exchanges. MCX provides trading of more than 70 commodities at a membership fee of just $20,000, while NYMEX charges $4 million on the crude alone. Similarly, the transaction and the impact costs are significantly lower giving it an edge over other exchanges.
“More than anything else,” says Shah, “it is the pleasure of touching the lives of 500,000 people who have associated themselves with MCX through 1800 brokers (members) the exchange currently houses.” In just three years’ time, MCX’s members have increased more than two times to the 700 members the 100-year-old Bombay Stock Exchange has on its list.
Globalizing Business Approach
With the start of DGCX, FT made its foray into global markets replicating its systems to suit the need of each country the company ventures into. The recent acquisition (buy back) of one percent stake from FT by the Dubai Government, valuaed at $1.25 billion, upped FT’s popularity amongst its customers both existing and potential. Interestingly, even though there are 23 exchanges in the Middle East today, by some estimates, DGCX is the only successful one on a global scale. “The Middle East had no history of commodity trading. With most people having liquid cash, DGCX opened a new avenue to diversify their funds,” said an exuberant Massey.
It is here, in identifying assets peculiarly to each country, that FT is trying to unlock the ten of trillions of dollars. “Most capital in the developing world is ‘dead’ and, as a result, it cannot perform its proper economic function. What needs to happen is unlocking these assets measured in tens of trillions of dollars,” says Shah on how the value locked in asset classes like commodities, such as copper, tin; currency and real estates are central to his company’s future and business.
To capitalize on the currency exchange market, FT and DGCX recently launched the world’s first Indian Rupee Futures Contract: an innovative step to help Indian technology outsourcing companies to maintain stability in revenue given a fluctuating currency (especially dollar) market. In Mauritius, FT decided to open up a multi-commodity exchange called Global Board of Trade (GBOT) to help producers and consumer in 50 countries in Africa to participate in organized trade of commodities. And for the first time in the history of the African continent, which did not have a single organized market for any asset class, FT will bring its technology and operational expertise to create a market where farmers, mine owners and other businesses in Africa can participate in a transparent mechanism for trading and get better value for themselves.
Though the penetration of the regulated market to the world population is miniscule, the Dubai and Mauritius experience has given the leadership team of Financial Technologies enough conviction to replicate the model in other parts of the world. At present, markets such as Africa, East Europe, the Middle East, Latin America, and South East Asia remain largely under-penetrated in terms of exchange ventures. These regions account for only 20 to 25 percent of the number of exchanges compared to the developed markets, while their economies are growing at much faster pace.
The growing number of international listings from these countries, the steady rise in consumption of natural commodities and the move towards financial futures (currency, stock, bond, options) all pose exciting opportunities. The challenge lies in creating financial instruments that can trade on the underlying assets. And that’s where the company is headed towards.
Its ambition is to democratize trade by bringing in lot of interactive customers over its platform and creating a fair price market to everyone. “People come to places where it is interactive and attractive. And where there is inflow of demand and supply, there we can also see rational prices being offered,” says Shah. These exchanges propagate the benefits of ‘price transparency’, ‘risk hedging’, and ‘structured finance platform’ to the masses, which in turn effectively helps the company unlock value at the middle and bottom of the pyramid while democratizing economy as a whole.
The Road Ahead
Shah strongly believes that with the right support and guidance, the dream of creating an inclusive and equitable growth is now within our reach. The path to its realization goes through next-generation tech-centric, globally competitive financial markets.
Over the past decade or so, Shah has devoted all his energies in creating as many of these markets in as many asset classes as possible. “We are players in a high-speed, high-stake game, we can’t stop now,” he declares. His goal is to create as many millionaires as possible, through the success of his ventures. His business model, whereby he takes an equity stake in lieu of the technology platforms instead of selling the software outright is still one-of-its-kind globally, and is giving him desired returns.
Shah says, “We are excited about the future: of India, which is emerging as the new destination for mass disruptive innovation and of Financial Technologies, which is striving to make those mass disruptive innovations possible. We would like to see many more of the likes of Vasco Da Gama and Columbus to come to India for trading opportunities. This time though, we are well guarded against a possible repeat of the ‘East India Company’ experience. This time, the remote is in our hands.”
Second Green Revolution: Bridging Urban–Rural Divide
The National Spot Exchange (NSEL) of the Financial Technologies Group is modeled on 7500 mandis (market yards) across the country, creating a network of mandi-specific spot exchanges and linking them to a single platform: the ‘common Indian market’ or MCX.
“Through NSEL, we have been able to minimize the price variation between mandis. For instance, earlier the price difference of a particular commodity in two mandis was nearly 40 to 50 percent. It is now reduced to five percent,” says Anjani Sinha, MD and CEO, NSEL. This protects the farmer’s interests; were he to sell his produce at a mandi where the price being offered was much lower than the original, he’d stand to lose a lot.
FT now plans to leverage the NSEL experience to create spot exchanges in other agrarian-oriented third world countries. The primary reason for this is that NSEL, along with Safal National Exchange of India (SNX)—also a FT group venture trading in vegetables and fruits—has removed the menace of middlemen. Says Nanje Gowda, a farmer we met while traveling across rural Karnataka “Earlier, irrespective of whether the times were good or bad, we always got very low prices for our produce, since we had to deal with several middlemen in the mandis.” Now, they get much better prices.
Madappa, another farmer from the same region, tells us over a cup of coffee, “Last year, I had to sell my Alphonso mangoes at a very low price since the supply was more than the previous year.” Ravishankar Natarajan, CEO, SNX says that the misfortune could’ve been avoided had Madappa taken the help of the National Bulk Handling Corporation (NBHC).Lack of adequate warehousing has emerged as a major lacuna of the Indian agricultural system in recent years. Had warehousing facilities been up-to-the mark, farmers like Madappa could have stored their produce till global prices were favorable, thereby eliminating steep losses.
Now, the farmers can do so by using NBHC’s warehousing facilities. Anil Choudhary, CEO of NBHC says that there are 1200 warehouses that are either leased or hired by the corporation all over the country. These include central, state and private ones.
Also, corporation’s alliance with several banks enables it to provide structured finance for the rural economy. As against banks’ earlier practice of providing loans only against collaterals, these days banks that have an alliance with NBHC provide farmers with loans against warehouse receipts issued by the corporation. It has empowered farmers to scout for banks that give them loans at better interest rates.
Says Choudhary, “NBHC is committed to reduce post-harvest risk, minimize wastage of agri-commodities, serve and develop the nation’s post-harvesting infrastructural facilities, encourage all stakeholders in the Indian agri-ecosystem, achieve better price realization, and promote country-wide acceptance of standard grades and specifications.”
The corporation sees a big opportunity in the organized warehouse business. For a country where 70 percent of the population is dependant on agriculture, the requirement of storage facilities is ten times the current capacity. To bridge this demand–supply gap, NBHC plans to build 5,000 warehouses across India with ultra-modern infrastructure providing access to all. NBHC is trying to set up a billion-dollar warehouse infrastructure fund.
Investor comes on board
Having worked in Fortune 500 companies and been a successful entrepreneur, Miten Mehta was in India basically to invest in mid caps for a fund that was based out of Seattle. As he was scouting for technology companies that offer innovative disruptive business models and not a cost arbitrage model, he came across Financial Technologies. He met Jignesh Shah through a common acquaintance. He liked the story so much that he decided to come on board. While he continues to do a similar job—look for new strategic ventures for FT—he is making ground to set up a global $1 billion exchange fund, “Where we are leveraging our expertise in terms creating highly efficient markets and scaling it to the next level.” He is also driving the initiative to roll out FT Community wiring about 200,000 terminals, which will be accessed by half a million people. He also oversees FT Markets—which offers web2.0 applications such as chat, blog, forums, groups, tag, and wikis. The aim is to become the largest financial community social network, thereby tap the social capital of the financial community. He recently steered the raising of $100 million through Foreign Currency Convertible Bonds on the Singapore Stock Exchange, in order to finance the company’s new overseas ventures as well as for funding acquisitions. It is the company’s ability to attract globally proven talent like Mehta which is pushing the envelope constantly and taking the company to the next level.